Once you become a homeowner, your home will most likely become your biggest financial asset. As the cornerstone of your financial wealth, protecting it from losses — both physical damage and loss of its monetary value — is an important part of your duty as a homeowner. With expenses like HOA fees, property taxes, repairs, and upkeep, you might be curious … do you have to have home insurance?
“Most people think of home insurance as something that protects from catastrophic events,” says Ed Kaminsky, an agent based in LA County, California, with more than 30 years of experience.
Fire is the disaster that most homeowners mention when they think about home insurance. “If there’s a fire, and your house burns down, the homeowners insurance will cover it.”
In reality, homeowners insurance is a policy designed to cover a variety of things: the building itself, the personal property within it, other personal property you own, expenses stemming from accidents happening within the property, and even liability for your pets.
Do you have to have home insurance?
“You should always have home insurance,” Kaminsky comments. “But you are only required to have it if your property has a mortgage.”
If you own your home outright, or you purchased your home with cash, you won’t be required to have it, but “I can honestly count on one hand how many people I have met in my career that don’t have insurance. It’s pretty rare to not have it.”
If you do have a mortgage loan on your home, and your homeowners policy was cancelled for whatever reason, you are likely legally in violation of the terms of your loan. This is why it’s so important to check a few times a year and make sure your insurance policy is up-to-date.
How does insurance work?
In most typical policies, you will see coverage for the following items.
This is insurance-speak for the building itself. It includes both the main home and any detached buildings, such as detached garages or sheds. If your house is damaged or destroyed, your homeowners insurance will aim to rebuild or replace your home.
For insurance purposes, this includes both your possessions inside the home as well as things you might carry on your person when you leave your home. Your belongings are protected in case of loss and theft. You can expect to receive somewhere between 50% and 70% of your dwelling coverage for a possession claim, depending on what’s lost or stolen.
If there’s some kind of accident in your home, like a dog bite or a fall, your homeowners insurance policy will cover medical and legal expenses stemming from the incident. This typically translates to between $100,000 and $500,000 for legal expenses, and between $1,000 and $5,000 for medical payments.
Additional living expenses
If you have to leave your home while it is being repaired due to loss or damage, you will receive up to 20% of your dwelling’s coverage to help pay for those expenses..
When an insurable event covered in the policy happens, you file a claim with your insurance company, pay a deductible amount established in the insurance contract, and the insurance will cover the rest of the repairs, up to the coverage limit.
In many instances, the claims process is when your insurance agent can help put you in touch with the right departments within the insurance company, make recommendations, and help guide you through the process.
Purchasing the right insurance coverage for your needs is key
“You have to watch out and ask lots of questions of your insurance agent,” Kaminsky warns.
“It’s easy to make the assumption that all catastrophes are covered equally, or that your insurance coverage would cover your home to be rebuilt today if it were to be a total loss.”
The 16 named perils are specific kinds of damage or losses listed in your policy, according to Lemonade, that cause your coverage to kick in. These will automatically be covered in most policies:
- Fire or lightning strikes
- Windstorms and hail
- Aircraft accidents or damage
- Vehicle accidents or damage
- Smoke damage
- Damage from falling objects
- Damage due to weight of ice, snow, or sleet
- Accidental discharge or overflow of water or steam (this doesn’t include flooding!)
- Sudden and accidental tearing, cracking, burning, or bulging of your home’s materials
- Damage caused by freezing temperatures
- Sudden accidental damage caused by short circuiting
- Damage due to volcanic eruptions
On the flip side, policies also commonly exclude damage for causes like:
- Flooding, including drain and sewer backup
- Earthquakes, landslides, and sinkholes
- Infestations by birds, vermin, fungus, or mold
- Wear and tear or neglect
- Nuclear hazard
- Government action, including war
- Power failure
According to Kaminsky, accidental fast flooding is covered as a catastrophe similar to fire, but slow leaks that cause damage over time — like a leaky humidifier that encourages mold to grow, for example — are usually not covered in regular insurance policies and require a flood rider to be added to your coverage.
The other thing to watch out for, according to Kaminsky, is how the cost to rebuild is being calculated. Are they estimating the correct cost per square foot to replace your house? Do you actually have the coverage to replace everything you own if you were to lose everything today?
For personal property, in order to ensure proper coverage, it is suggested that you keep larger or more expensive items in an itemized list or database to ensure they are properly replaced. You should always discuss any specific needs with your insurance agent; you might have a collection of valuable baseball cards, or you might have a few expensive art pieces, or an antique piece of furniture you keep at home, and those might throw the cost-to-replace calculation off balance.
There’s a caveat, though: Your property should be properly protected, under lock and key, when your possessions are stolen; otherwise, your insurance company will consider it negligence and won’t cover your loss.
Keeping a home inventory is a great way to make sure your coverage is correct. Apps like Sortly or Nest Egg allow you to easily organize the entire contents of your home with pictures, locations, categories, and tags, in case you ever have to file a claim.
When should you change your insurance coverage?
There are instances in which you will want to modify or double-check your insurance coverage:
If you start running an in-home business
You should modify your coverage to include additional liability coverage if you’re dealing with people coming in and out of your home (such as a home-based spa, or a daycare center), or if you have expensive equipment you keep at home for your business.
If you’re renovating your home
You might be upgrading the finishes, which would affect the cost to replace your house, or finishing previously unlivable space (like a basement or an attic), which would change the per-square-foot pricing to replace or repair your home.
If you get a pet, a pool, or a trampoline
If you are getting a pet for the first time, it might be a good time to check your liability coverage. Similarly, an addition like a pool or a trampoline, which are statistically proven to increase the likelihood of injury on your property, might mean your insurance cost and coverages need to be adjusted.
If the cost of homes is rising quickly in your area
This will mean the cost to replace your house could be rising higher than the expected or projected adjustments.
What can happen if you decide to forego home insurance?
Let’s walk through some scenarios that could happen if you decided to cancel that policy after paying off your home.
You could have trouble selling your home
Not having a home insurance policy makes your home less attractive to buyers.
There’s a risk of something (fire, vandalism, or any number of unfortunate events) happening while the house is under contract and before the buyer can close on the purchase. In that case, both the buyer and the seller would end up with no property to buy or sell.
Natural disasters happen
Wildfires and tornadoes are natural disasters that can appear out of nowhere, without warning, and leave you with serious damage or the need to completely replace your house.
If you don’t have insurance, this could be a total loss for you, as you would be responsible for repairing or rebuilding your home on your own.
Someone burglarizes or vandalizes your house
If your home is broken into and expensive equipment is stolen, or the inside of your home is vandalized, an insurance policy would cover the repair and replacement of everything that was stolen or damaged.
Someone gets hurt on your property
You purchase a trampoline for your kids, you have a swimming pool for your family that your neighbors sometimes enjoy, or your dog can sometimes get defensive.
If something bad happens to someone in your property — a fall, a dog bite, a broken bone — your homeowners insurance will help protect you from lawsuits and medical bills. But if you don’t have insurance, you won’t be protected in this scenario.
An angry neighbor decides to sue you
Sometimes you end up in a neighbor dispute over trees that hang over the property line, or the way a fence is built, and the next thing you know, you’re in the middle of a lawsuit.
Kaminsky has served as an expert witness at a few of these depositions, and he notes that your insurance company can also help defend or represent you in this case, assuming you have an insurance company.
Hopefully this primer has drilled down the importance of owning and keeping tabs on your homeowners insurance coverage. If you need more information about home insurance, check the Homelight Home Insurance center, or contact a local insurance agent.
Header Image Source: (Nick van den Berg / Unsplash)